Mutual fund investing is a way for you to invest in securities such as bonds and stocks, but without the hassle and research involved in choosing individual stocks. With a mutual fund your money is invested in various funds, which are managed by professional investors, for a fee, and then dispersed as profits.
Mutual fund investing is often used to diversify your portfolio. In a normal individual investment portfolio, you are investing in different businesses in order to earn profit from different business segments. But in a fund investing scenario, you are actually investing in several different companies and their assets. This gives you the opportunity to earn profit from many different businesses as well as sectors of different industries.
One advantage of mutual fund investing is that you can invest a smaller amount of money into each fund. However, you will not be able to choose any particular industry or segment of the market, and you may also not be able to choose your investments according to the sector you are interested in. For instance, if you invest in a fund investing in industries such as healthcare, you may have the chance to earn profit from industries such as information technology. However, the returns on those investments may not be high enough to meet your overall investment requirements.
But with mutual funds, the same industries are available in many different investment portfolios, and you are likely to earn profit from many different segments of the economy, thus giving you the potential to earn profit from many different sectors. This is the beauty of fund investing.
Another advantage of mutual funds is that you can save money with the help of tax benefits. Because of the many diversified holdings of the fund management companies, there is less chance for you to get hurt by the fluctuations in the market. The fund management company invests the money earned by you as the profit, so it does not need to pass on the earnings to you as a dividend.
However, there are drawbacks to mutual funds, as well. As mentioned above, since they are managed by different people, you may not be able to decide on your own whether you should invest in one particular sector, or invest in several sectors, and then take advantage of different types of investment portfolios. You are likely to invest only a portion of your capital in each fund you invest in.
Another disadvantage of mutual funds is that you cannot have full control over your investments, because the funds are managed by an investment manager. Thus, you would not be able to exercise control over your investments and make decisions regarding your portfolio. Even though this is not possible, you can always liquidate your funds in case of an emergency. The manager can sell them for a profit in order to raise cash for your other investments, or in order to pay for taxes.
Finally, mutual funds can be quite expensive. While this might seem a drawback to some investors, it can be a huge advantage to others. Mutual fund investing can be costly if you do not know where to start looking for the best funds for you, and you would need expert advice in order to find out what are good options.
The important things to consider are the returns on the fund investments, as well as the total cost of purchasing them. Some of the common factors affecting mutual fund investing are the performance of the market, the volatility of the stock market, inflation and the amount of the assets that are held in the fund.
If you want to succeed in fund investing, you need to have a strategy and stick with it. Never be tempted by the low costs of the mutual funds. Instead, analyze them thoroughly before investing in any mutual fund. Look at how the mutual fund companies manage the money they are investing.
It is not difficult to understand the advantages and disadvantages of mutual fund investing. It just takes some time to analyze them and choose the one that will work best for your needs.